Elephant or ant? Being ‘equity precious’ in your small business can hinder its growth (and your pocket).Dec 31, 2019
Here is one of my favourite quotes when it comes to strategy for small business. It beautifully sums up the quandary many owners and entrepreneurs fall in to early in their business career, under the curse of being ‘equity precious’:
“It is better to have the tail of an elephant than the body of an ant.”
Or, another common way this is put is ‘it is better to have 25% of something than 100% of nothing.’
For me, this quote is a painful reminder of the tech wreck.
I started a gift e-tailer online on 1 December 1999 (my business partner had two large gift stores in Melbourne and more than 30 years experience in the industry – I brought the “e” to our e-tailing).
About two months earlier, in October, a friend started a developer community website from his bedroom, on his own. I had interest and offers to be bought out (in part of full) in the first 6-12 months of launch, but was stubbornly emotionally tied to my business and couldn’t see what were actually good offers.
My friend (within three months of launching) had sold his internet company to NASDAQ listed internet.com for more than $1m…
Granted, the business models were different – his was set to scale much much faster than mine – but the point remains: at that time, people were over-paying for internet companies.
When I asked him what was his next business he was going to start or invest in, he said:
“Oh, I’m not an entrepreneur, like you. I was just in the right place at the right time and knew a good deal when I saw it. And took it.”
‘And took it’. Those words still haunt me and the many alumni from the tech boom.
My friend took the emotion out of it. He sought objective, impartial professional advice who all said ‘sell’. Then he acted on it. For many growing small businesses, unless you have a product or service that is a proven cash cow (like ads are to Google for example), your small business will have a ferocious appetite for cash.
At all times, the sensible small business owner or entrepreneur will measure their growth ambitions with the cash they have available.
But for some, or some businesses in the prime seat for growth, carving off some of your babys’ equity to an investor is wise. When should you sell some of your shares or equity in your growing small business?
For a lot of small businesses with fast growth it is somewhere between never and soon(ish). It will always be a judgement call by the small business owner of when and how much equity (the ant) you give up now, for a smaller slice of a larger pie (the elephant).
One of the worst things you can do is get emotional about the decision. The smartest thing you can do is take objective advice from people you trust, look at the numbers and make a decision.
Sometimes a funding path that makes sense for a growing small business is to sell some equity. Move from having ‘the ant’, in exchange for ‘the tail’ of something much larger – the elephant.
Each business and situation is different, of course, but at least be more open-minded to the idea than I was in one of my first businesses.